ECB's Lane: energy shock's 'demand destruction' may limit need for more rate hikes

European Central Bank chief economist Philip Lane said on Monday, 5 October, that the ECB remains on a “middle path” in which a measured monetary policy response is appropriate to keep inflation in check. Speaking at the ECB’s 2026 Conference on Monetary Policy in Frankfurt, he said it had been “prudent” to raise the deposit rate from 2.00% to 2.50% across the June and September projection rounds, but stressed that the bank is “not on a pre-committed rate path” and will decide meeting by meeting.

“Demand destruction”

Lane described the renewed rise in energy prices since July as a “second wave” of the shock, carrying upside risks to inflation and downside risks to growth. Higher energy costs cut real household incomes and company profits, and geopolitical uncertainty can encourage precautionary saving and delay investment — channels that, all else equal, could limit the required tightening, he said.

Other brakes on growth

According to Lane, the energy shock remains the main driver of this year’s inflation rise, while non-energy inflation has so far been contained and underlying indicators do not show an upward shift in medium-term inflation. He added that the recent increase in long-term interest rates amounts to a material tightening of financial conditions in the euro area, and that the ECB expects fiscal policy to tighten in 2027 and 2028.